NEW YORK, July 10 (LPC) - US-based credit investors anticipate a busy July across the leveraged loan market as corporate borrowers saturate the asset class with new loan issuance before the inevitable August summer lull when deal-making traditionally slows down.
The flurry of new issuance this week comes as borrowers anticipate potential interest rate cuts by the US Federal Reserve, a move that typically tempers investor demand for floating-rate instruments, such as leveraged loans.
Meanwhile, newly issued collateralized loan obligations (CLOs), which are the largest buyers of leveraged loans, logged strong new issue numbers throughout the second quarter of 2019. Just over US$10bn of new CLOs priced in June, taking first half volume for 2019 past US$65bn and making it the second-busiest six-month period after the record US$68bn worth of new CLO paper that priced in the first half of 2018, according to data from LPC, a unit of Refinitiv.
“CLO issuance in the last two to three months has been pretty good. The CLO machine is printing and this supports the leveraged loan calendar,” said Tim Gramatovich, chief investment officer at Gateway Credit Partners, a division of B. Riley Financial.
This month’s boost in dealflow, however, comes amid cries over deteriorating lending standards from regulators such as the Fed, and underwriters, in some instances, are acquiescing to investor demands with tighter documentation and steeper original issue discounts.
“The dynamic is that (borrowers) are going to go with the most aggressive provisions they think the market can bear and if issues arise, things start to flex,” said Enam Hoque, a vice president at Moody’s Investors Service.
At least eight new broadly syndicated term loan Bs have been pitched to investors looking to put money to work before August. These include sizeable billion-dollar offerings from hamburger chain Whataburger and healthcare analytics firm Press Ganey, as well as broadcasting companies ION Media Networks and Sinclair.
Despite this month’s wave of new financings, however, investors are cognizant of underwriters foisting aggressive term loans on them, and are assessing credits with greater scrutiny.
Last month saw supermarket chain Smart & Final and digital printer Electronics for Imaging offer loans at steep discounts, and some single-B credits in July may be forced to pony up higher interest rates and tighter loan documentation.
Teneo Holdings, for example, offered a series of changes to investors on July 9 for a proposed B2/B rated US$365m term loan, unveiling revisions that investors hope become the norm across future leveraged loans.
Teneo, which provides consulting services across a variety of industries, shortened the maturity of the loan to six years from seven, widened the spread to 525bp over Libor from a range of 450bp-475bp, and deepened the discount to 96 cents on the dollar from 99 cents.
The company also placed a 25% cap on Ebitda add-backs, or expenses returned to the company’s profits to reduce its leverage, amid several other documentation changes, banking sources said.
“There is some punishment on the side of these add-backs,” said Gramatovich. “While we see some of these caps, it’s not extreme discipline, but at least people are aware of the stupidity of add-backs.”
A second investor, who welcomed the influx of new loan issuance, described this month’s numbers as “a bit of a mini-surge,” but stopped short of comparing 2019 to the heady new issuance volume of 2017 and 2018. (Reporting by Aaron Weinman. Editing by Leela Parker Deo and Jon Methven)